Question #2

Kirk Leasing Corporation signs an agreement on January 1, 2020 to lease machine to Hartlen Limited. The following information relates to the agreement.

• The term of the non-cancellable lease is five (5) years, with no renewal option. The machine has an estimated economic life of seven (7) years.
• The asset's fair value on January 1, 2020 is $400,000.
• The asset will revert to the lessor at the end of the lease term, at which time the asset is expected to have a residual value of $100,000, which is NOT guaranteed by the lessee.
• The agreement requires equal annual rental payments of $81,036 to Kirk, the lessor, beginning on January 1, 2020.
• Hartlen Limited pays $4,500 executory cost to Kirk Leasing, in addition to the rental payment above.
• The lessee's incremental borrowing rate is 11%. The lessor's implicit rate is 10% and is known to the lessee.
• Hartlen Limited uses the straight-line depreciation method for all machine and rounds amounts to the nearest dollar.

Instructions

Lessee

1. Assume lessee Hartlen follows IFRS, what type of lease is this for Hartlen?
2. Prepare an amortization schedule for Hartlen Limited. Use Excel and round all amounts to the nearest dollar. (Note: you may find the =round formula helpful for rounding in Excel.)
3. Prepare all of Hartlen's journal entries for 2020 and 2021 to record the lease agreement, the lease payments, and all expenses related to this lease. Assume that the lessee's annual accounting period ends on December 31.
4. Show how the lease is reported in the income statement of 2020 and the balance sheet of December 31, 2020.
5. Assume Lessee Hartlen follow ASPE, determine the type of lease this is for Hartlen and prepare all necessary journal entries accordingly.

Lessor

6. Show the calculations that Kirk, the lessor, used to arrive at the lease payment amount of $81,036.
7. Assume Kirk follows IFRS and classifies the lease as a finance lease, prepare an amortization schedule for Kirk for the lease term.
8. Prepare all necessary journal entries for 2020 and 2021 for Kirk to record the lease agreement, the lease payments and all other payments received. Assume that the lessor's annual accounting period ends on December 31 and carrying value of the machine was $400,000.
9. Assume that the Kirk's carrying value of the machine was $360,000 on January 1, 2020, Re-do Kirk's journal entries on January 1, 2020 to record the lease agreement and the initial lease payments received.